Besides other prevailing challenges, apparel companies need to now tackle the steep increase in prices of raw materials as well. As per recent stats, wool prices have soared to record highs this year on booming demand, while a drought in Texas and rising Chinese imports have sent cotton futures to a nearly six-year peak in the US. The price of oil used to make synthetic fabrics like polyester and rayon is up over 50 percent from a year ago.
Retailers, including Abercrombie & Fitch and Ralph Lauren, have already highlighted rising supply chain costs as a potential threat. But they have limited options beyond passing along prices to customers, an unappealing prospect for retailers facing declining mall traffic and increased competition from low-price competitors online. Some, including H&M, are planning steep discounts in coming months to reduce inventories, and could now see rising prices for cotton and polyester squeeze already slim profits. Adam Mansell, Chief Executive of not-for-profit organization UK Fashion & Textile Association feels margins within the supply chain are incredibly tight. Unless you are supplying top-end luxury goods, it is a very difficult world to be in at the moment.
Reasons for price rise
Cotton prices are jacking up because bad weather is reducing global supplies. Cotlook, an independent analysis firm, forecasts a decline in the world’s stock of cotton by the end of this year. Chinese textile manufacturers have also begun drawing down massive government stockpiles.
Oil prices have risen steadily over the last year, as the Organisation of the Petroleum Exporting Countries, as well as Russia, have reduced production, and countries like Libya and Venezuela have seen supply outages. Brent crude, an international benchmark, traded at about $78 a barrel last week, compared to about $50 a barrel a year ago. The fashion industry’s demand for wool is rising faster than farmers can handle. Wayne Gordon, the commodities analyst at UBS Global Wealth Management Chief Investment Office, highlighted that you have to have the breeds of sheep, and it takes 2-3 years to have any impact on the market. It will put a pressure on the fashion industry.
Indeed brands have a difficult choice to make – raise prices and lose customers or keep customers and accept lower profits. That’s a tough pill to swallow at a time when 700 clothing stores shut down in the UK alone last year, according to Local Data Company data compiled for PwC. At Abercrombie & Fitch, commodities are pushing expenses higher, though the company said transportation costs are a bigger threat right now. John Kernan, an analyst at Cowen, stressed that things are going to get be tougher, they are going to raise prices to offset cost inflation. It will be difficult.